The Equality and Human Rights Commission was warned today that the government would not tolerate continued waste of taxpayers' money, as auditors said they were unable to approve the annual accounts because of "serious failings" in the way it had procured contracts.

The National Audit Office's warning comes as the body undergoes radical restructuring, aimed at making it "smaller and more tightly focused".

The home secretary Theresa May, said: "The EHRC has a track record of not being careful enough with taxpayers' money, and these accounts show that problems there persist. Failure to deliver will not be tolerated by this government – we will look at further sanctions if the problems highlighted by the auditors are not dealt with.

"The government is totally committed to creating a more equal society for everyone, but we're also committed to cracking down on waste and failure."

The EHRC has already been fined £508,000, in the form of reductions to its grant, to compensate for pay rises to staff that went beyond government-agreed maximum limits, the NAO report said. It was fined a further £200,000 last month after missing a deadline to produce guidelines on how to implement the Equalities Act, forcing the Equalities Office to pay another body to produce the guidance.

The NAO said that the commission's spending practices had begun to improve, but warned that a number of weaknesses highlighted in the report were deep seated, and said it was "likely that these problems may have continued beyond 2008-09", the yebar that the accounts cover.

Neil Kinghan, director-general of the EHRC, said that since 2009 a new finance director had been appointed, and stronger accountability mechanisms had been put in place. "I regret that the commission made mistakes in its first 18 months, and accept the NAO's decision to qualify our accounts as a result," he said.

A letter sent by May last week to the commission chair, Trevor Phillips, after a private meeting to discuss the accounts, appears to confirm that the EHRC will survive the quango cull, but indicates that it will be reformed and streamlined.

In the light of the structural changes expected to be announced in late autumn, May asked Phillips to halt interviews for a new chief executive, a post which has remained unfilled for a year.

"We agreed that the commission is about to enter a period of significant change from which it is likely to emerge smaller and more tightly focused," she wrote in the letter, seen by the Guardian. "The recruitment process should be halted, and a new process launched once we have a clearer idea about what the reformed organisation will look like."

The EHRC's budget has been cut by £7m to £53m, but officials expect deeper cuts. Staff numbers will be cut from 525 to a maximum of 400, and will probably go lower than that, a source said.

The body is undergoing an internal review, aimed at establishing which equality issues should be prioritised.